Synopsis: The fact that there will be no change to the 2010 Social Security cost-of-living adjustment (COLA) is either good or bad news.

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No Change in Social Security COLA Offers Good and Bad News, Says Wolters Kluwer Law & Business.

Depending upon who you are, the fact that there will be no change for the second straight year to the Social Security cost-of-living adjustment (COLA) is either good or bad news, according to Wolters Kluwer Law & Business. Wolters Kluwer Law & Business is a leading provider of research information and software solutions in key specialty areas for legal and business professionals, with products under the CCH and Aspen names (wolterskluwerlb.com).

"For people relying on Social Security benefits, another year without an increase is not welcome," said Avram Sacks, JD, Social Security Law Analyst for Wolters Kluwer Law & Business. "However, for high-income earners, it means a reprieve because there also will be no increase in the amount of their wages subject to Social Security taxes."

Social Security COLAs Past and Future

Social Security law provides for a COLA based on changes in the consumer price index for urban wage earners and clerical workers (CPI-W) from the third quarter of one year to the next. 2009 and 2010 mark the only two years that there has been no increase since the COLA was introduced in 1975.

The Social Security COLA is applied to several types of benefits: retirement, disability and survivors - such as children and widow(er)s. Another type of benefit, the "maximum family benefit" is actually a threshold that is increased based on the rise in national average wages and is not impacted by a change in the CPI-W.

Looking ahead, an increase in Social Security benefits for 2012 is likely to occur, since it would be based on increases in the price index from the third quarter of 2008. By this time next year, there will have been some growth in the CPI-W. However, Sacks explains it will likely not be very large.

"Two years ago, inflation - particularly related to food and gasoline - mandated a 5.8- percent increase in the COLA for 2009 based on the 2008 third quarter CPI-W, which was the highest increase since 1982. The index in subsequent quarters dropped significantly, dropping 2.1 percent from 2008 to 2009 - and still has not returned back to the 2008 level, rising only 1.5 percent over the past year, although it is now nearing it," explained Sacks. "As a result, in order to produce an increase for 2012, there has to be a rise in the consumer price index through the third quarter of 2011 that exceeds the 2008 third quarter CPI-W."

For Workers, No FICA Increase Now, But Just Wait Until 2012

Just as Social Security beneficiaries will see no increase in benefits, for the second straight year, highly paid wage earners will see no increase in the current wage base of $106,800 on which Social Security taxes are due for 2011. The amount of FICA (Federal Insurance Contributions Act) tax deducted from paychecks next year will be no higher than the tax imposed on identical earnings in 2009 or 2010.

The wage base is based on national average wages and not the consumer price index. The law states that there can be no increase in the FICA wage base if there is no COLA. For the first time since the Social Security Administration began tracking national average wages in 1951, the national average wage index has declined, with the index for 2009 at a level that is 0.97 percent lower than the index for 2008.

Sacks calculates that absent the prohibition, the wage base would have risen to $109,200 for 2010 and would have remained the same for 2011 since the Social Security Act does not allow the wage base to go down from one year to the next. However, since the $109,200 amount is purely hypothetical, any calculation of the wage base for 2012 will be based on increases above the current wage base of $106,800.

"Although there is no wage base increase again for 2011, based on projections by the Social Security Administration, we will likely see a benefit increase in 2012," Sacks said. "That increase will trigger operation of the wage base formula for 2012. That formula will take into account the cumulative net increase in national average wages during the previous two-year period during which wage base increases were barred due to the lack of a benefit increase."

According to the 2010 Trustees' Report, the 2012 wage base could be anywhere from $113,400 to $114,300.

Medicare Beneficiaries and Social Security Wage Earners to See Few Changes

In addition to Social Security benefits and taxes, a change - or no change - in COLA also has an effect on several other program amounts, including the amount Medicare beneficiaries have to pay for Part B premiums and the amount Social Security beneficiaries can earn before having their benefits reduced.

Most Current Medicare Beneficiaries Spared from Part B Increase

There will be no increase in the Part B premium for most beneficiaries. This is due to a "hold harmless" provision that blocks premium increases when benefits do not rise. However, a relatively small number of Medicare Part B enrollees with higher incomes will pay a higher premium based on their income. These earners make up about 5 percent of the Medicare beneficiaries according to Sacks. New enrollees or beneficiaries who have not yet started paying Part B premiums also can see an increase from the current premium level when they start Part B coverage.

"The increase in Medicare Part B premiums for those affected could be significant, because, in effect, the law requires them to make up for the lack of increase for the large majority of beneficiaries," Sacks said.

Social Security Beneficiary Earnings Limits Also the Same

The amounts that certain Social Security beneficiaries can earn without having their benefits reduced - "Retirement Test Exempt Amounts" in Social Security terminology - also will stay the same next year.

Workers under full retirement age of 66 who are receiving benefits can still earn up to $14,160 in 2011, or $1,180 per month, without having their benefits reduced. A modified test applies to workers who reach the full retirement age of 66 in 2011. In each month before they reach full retirement age, these individuals may earn up to $3,140 without having their benefits reduced. Once they reach full retirement age, benefits are no longer subject to any retirement test.

About Wolters Kluwer Law & Business -Wolters Kluwer Law & Business is a leading provider of research products and software solutions in key specialty areas for legal and business professionals, as well as casebooks and study aids for law students. Its major product lines include Aspen Publishers, CCH, Kluwer Law International and Loislaw. Its markets include law firms, law schools, corporate counsel, health care organizations, and professionals requiring legal and compliance information. Wolters Kluwer Law & Business, a unit of Wolters Kluwer, is based in New York City and Riverwoods, Ill. Wolters Kluwer is a market-leading global information services company.

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